The nation's 500 largest banks in 1991 continued their full-scale retreat from the municipal market, reducing net tax-exempt assets by $9.84 billion, or 21%, according to federal banking reports.
The degree of selling was intense. Forty-three institutions sold off more than 90% of municipal holdings, 13 of which completely wiped out their municipal portfolios, the reports say. For banks, tax-exempts are valuable only during profitable times, and 1990 was a rough banking year, bank officials said.
Eight of the top 10 declines involved portfolio reductions of 80% or more, leaving very few bonds for the banks to sell this year.
Norstar Bank of Upstate New York was the largest seller of municipals last year, shrinking its portfolio by $485 million, or 79%, to $129 million from $614 million.
Citibank was the second-largest seller last year, reducing its portfolio by $438 million, or 87%. Glen R. Sergeon, managing director of the municipal finance division of Citicorp Securities Markets Inc., said selling tax-exempts satisfied several bank strategies.
"The company was looking for ways to shrink its assets," Mr. Sergeon said, "and marketable, tax-exempt securities in a low interest-rate environment were not consistent with the protfolio management practices."
Looking head, Citibank could return to the market as an investor, "but right now I don't know where the entry point will be," he said. "I don't see the need for tax-exempt income."
Over the past few years, Citibank's selling has been massive. At the end of 1989, it was the second-ranked holder, with $1.43 billion. The following year it lopped $923 million from its portfolio.
Valley National Bank in Phoenix had the third largest decline in holdings last year, selling of 92% of its $446 million portfolio. The bank fell in the rankings to 236th place from 16th at the end of 1990.
The banking industry's reductions suggest the phenomenon is nationwide, with smaller institutions in Arizona, California, New York, Maryland, Oregon, and South Carolina dumping bonds. And the regional banks were joined by larger firms, such as Mellon Bank and National Westminster Bank USA.
Banks' flight from municipals is a direct result of the Tax Reform Act of 1986, which made the after-tax treatment of tax-exempt income far less attractive.
The only remaining market of interest to banks consists of "bank-qualified" bonds, those bonds sold by municipalities coming to market with no more than $10 million of debt per calendar year. These bonds appeal to local banks with after-tax profits to offset.
At Citibank, brokering bank-qualified bonds has become a profitable sideline, Mr. Sergeon said.
"We are a pretty active part in the bank-qualified market as a market-maker and as a wholesale participant, a buyer and seller," he said. "It's a peripheral market, but it tends to have a steadiness that we like, and it tends to have more reasonable spreads. There is a need for a wholesale specialist."
The market value of the 500 banks' holdings declined 19.2% in 1991, to $38.37 billion from $47.47 billion the year before. In terms of book value, the banks' holdings declined 21.3%, to $36.35 billion.
The nation's 100 largest banks, which hold about 57% of the 500 banks' combined portfolios, posted a 19.8% drop in market value, to $21.98 billion from $27.4 billion, and a 22.1% decline in book value, to $20.77 billion from $26.65 billion at the end of 1990.
Their share of the 500 banks' book-value portfolio dropped slightly in 1991, to 57.1% from 57.7% in 1990. That remained well below the 60%-plus share that the top 100 had in earlier years: 60.5% in 1989, 64.5% in 1988, and 63.5% in 1987.
The bank portfolio figures are based on the entries the banks make in their Federal Regulatory Report of Condition under the category "securities issued by states and political subdivisions of the United States." The report is filed with federal banking regulators every six months.
The figures were compiled by ADP Data Services Division in New York. Data for previous years have been revised to reflect mergers and acquisitions.
The 500 banks in the group are ranked by assets as of Dec. 31, 1990. They include credit-card and other specialty banks, even if those banks do not hold any municipal bonds.
Commercial banks were the largest group of investors in municipal bonds in every year but one from 1965 through 1982, according to the Federal Reserve Board's Flow of Funds Accounts. In 1980, for example, all commercial banks in the United States held $148.8 billion of municipal bonds, or 41% of the $365.4 billion of bonds outstanding.
But banks have cut back drastically on their holdings since 1985, when they reached a peak of $231.7 billion. They were overtaken by households in 1983, casualty and property insurance companies in 1989, and long-term mutual bond funds in 1991.
According to preliminary Flow of Funds data, all commercial banks held just $103.6 billion of bonds on Dec. 31, 1991, only 9.6% of the $1.08 trillion of municipals outstanding. Households held $553.5 billion, property and casualty insurers $140.8 billion, and mutual bond funds $137.1 billion.
Savings and loan associations and mutual savings banks, which are not included in the banking totals, held a relatively paltry $2.2 billion of municipals on Dec. 31, 1991, according to Federal Reserve data. The sector has never held more than $4.4 billion of bonds in any year.
Morgan Guaranty Trust Co. was the largest holder of municipal bonds among the 500 banks, with $2.37 billion -- $1.23 billion ahead of the next largest holder, NBD Bank of Detroit, which held $1.14 billion.
No other U.S. bank held more then $1 billion of bonds on Dec. 31. By contrast, six banks held $1 billion or more of municipals at the end of 1989.
Only one bank added more than $100 million of municipals to its holdings in 1991: Key Bank of New York in Albany, which jumped from $636 million to $777 million. Four other banks added between $50 million and $99 million to their portfolios.